It’s well-known that product differentiation results in higher prices and higher profit for companies. Hotels, for example, might distinguish themselves from other hotels by offering the best location, the best service or superior amenities. Without product differentiation, hotel rooms become, more or less, perfect substitutes for one another and prices fall accordingly. Why then, would hotels hide their names and sell rooms on websites like Expedia (EXPE) subsidiary Hotwire and Priceline (PCLN)?
This practice is called opaque pricing, and it’s becoming more popular as travelers look for cheaper ways to travel to exotic destinations. Opaque pricing can be applied to anything: hotel rooms, airline tickets, cruises and car rentals.
Focus on Rate-Sensitive Customers
Price-sensitive customers are those who make purchase decisions based predominantly on the price of a good or service. Hotwire and Priceline customers visit these websites specifically because they are looking for the best price on their hotel room, and, as such, the sites are able to price discriminate (related: How Do Hotel Night Auctions Work?). By promising hotels that their names will remain a secret until after purchase, the hotels accept a lower price. This enables the websites to pass these lower prices onto consumers who are indifferent about specific hotel differences. In exchange, the hotels can fill rooms that would otherwise have stayed empty and increase their revenue per available room (RevPAR) without compromising their rate integrity.
Preserving Rate Integrity
Rate integrity can be a key part of a brand’s marketing strategy. If hotels have established themselves as luxurious or high-end, they cannot sell rooms using the traditional supply and demand curve—where prices are lowered until the hotel is sold out—because it would cheapen the brand. By hiding hotel names, Hotwire and Priceline are able to offer lower prices until rooms are sold because only the purchasers will know exactly how low the price has temporarily fallen. As The Cornell School of Hotel Administration and Hospitality: Cutting Edge Thinking and Practice says, this allows hotels to reach both their regular brand-loyal and new price-sensitive customers.
Loyalties Can Change
Another advantage for hotels in using Hotwire and Priceline is that price-sensitive customers could shift their brand- or star-loyalties towards the new hotel. As Hotwire Director Tara Stangel explains in a London Loves Business article, a price-sensitive person who typically stays in 2.5-star or 3-star hotels may be enticed by a 4-star deal on Hotwire and book it solely based on its low price. If he enjoys himself, the next time he is looking for a hotel, he could find himself less price-sensitive than before. Perhaps he is now willing to pay a premium to ensure that he can again stay at the same hotel chain or maybe his expectations of a hotel stay have now changed and he can’t bear to book a hotel with fewer than four stars.
Guaranteed Bookings Are Good News
Yet another advantage that the hotels have when using Hotwire and Priceline is that the rooms, once sold by the websites, are guaranteed revenue. The bookings are non-refundable, so that the hotel will not have to worry about last-minute bookings. In addition, Hotwire and Priceline can save the hotel money as room bookings from third-party websites are generally not eligible for loyalty points.
Tips and Additional Information
The Internet is a treasure trove of information to help travelers who are wary about using Hotwire and Priceline. By matching the star-ratings, amenities, locations, etc. with traditional booking websites, customers can create a shortlist of the hotels they might win and decide if the cost savings are worth the risk of making a reservation at an unnamed hotel.
The Bottom Line
Whether you are a hotelier or a potential guest, using websites that offer opaque pricing is a winning situation. Hotwire and Priceline sell empty rooms at discounted prices to guests who are just looking for a place to sleep. These guests are unlikely to advertise their low rate to the other guests who could feel slighted at having been charged more money. Also, guests who enjoy their stay may become less price-sensitive in the future, resulting in a brand-loyal guest who will continue to increase the hotel’s profits.